Monday, October 13, 2008

The $64,000 Question

The only question now is whether Paul Krugman will pay taxes on the Nobel prize at the low rates enabled by the Bush tax cuts he has done so much to discredit, or if he will volunteer to pay taxes at higher rates he considers more fair.~Don Luskin

MP: The 2000 Clinton tax rates are shown above.

Assuming Krugman is already in the top tax bracket, the difference in income taxes on the $1.4 million prize income between the old rate under Clinton of 39.6% and today's rate under Bush of 35% would be $64,400. That amount could be sent to the Treasury as a gift to the U.S. government, here are the instructions.

(Update: Thanks to "notnidiot" for his comment that led to the new title.)

13 Comments:

Earlier today --- taking a break from a manuscript-project --- I posted the following comments at the Marginal Revolution . . . another outstanding libertarian web site like Mark's here; and for that matter, run by Prof Tyler Cowen of George Mason, and Mark's Ph.D. thesis superviser.

The original buggy comments, along with Cowen's initial post and all other 120+ commentators, can be found by clicking clicking here

Please note: the initial comment refers to Barkley Rosser's summary of Paul Krugman's Nobel-winning work on trade theory . . . Rosser himself a professional economist at James Madison University. And, I add from what I've read about him, a very good economist in his own right.

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1) That's a good analysis, Barkley, of Krugman's contributions and the possible influences of others. (Rosser's comment was posted at 10:42 A.M. if you want to read it: very clear and to the point, that post of his)

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2) Note though. Nobody in this thread so far has referred to the role of the prisoners' dilemma in strategic trade theory . . . the term that battles with New trade theory for the work of Krugman and others since the late 1970s.

In particular, new or strategic trade theory doesn't just realistically look at trade across countries in the presence of imperfect competition (oligopoly) and economies of scale. It also then allows for a role for the government through various trade subsidies or protection to foster advanced technological industries in the ways Japan and South Korea and now China have pioneered.

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3) Enter the prisoners' dilemma --- a game theoretical model developed in the 1950s that shows how such trade competition in the presence of oligopoly and government subsidies or protection can be modeled as a PD. In such a model, the alternatives are 1] cooperation or 2]defection between governments seeking to promote the growth of exports of their countries' champion industry in third countries.

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Brander and Spencer, the first to use this PD interaction (strategic) game theory model for trade, showed that unless cooperation is arrived at as an outcome between the competing governments, they will --- if both governments are rational --- end up with the worst outcome: mutual defection, with a huge waste of taxpayer money (subsidies) by both.

-- In PD modeling, note swiftly, the preferred outcome is always Defection by each actor, with a hope the other will be suckered (Cooperate).

-- Hence the four options in a 2x2 modeling in order of preference in the single-shot P.D. interaction game are DC, then CC, then DD, then CD .... where the first choice is yours (D), and the other actor (government or firm) is suckered by choosing (C) and suffering all the losses that you gain from.

-- Note what happens. Since each player --- two business firms or, in the trade case with subsidies or protection, two governments --- will choose D, they end up with a worst outcome DD than the second and preferrable one: CC.

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4) Krugman adopted these ideas --- virtually all scholars draw on earlier work --- and applied it in the late 1980s and into the 1990s --- in a variety of interesting and informative ways.

His work is the more realistic, too, from the viewpoint of a political scientist like me, because of the role of governments and market-power that strategic trade theory realistically focuses on in contrast to traditional pre-1980 trade theories.

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5) Wait though.

Krugman also supports free trade --- has said so as recently as this year.

So, theoretically, what to do if the PD-model can capture the relationship, say, between Japan's computer industry in the 1980s and early 1990s and the US's computer industry . . . with the latter having gained "first move" advantage?

If Krugman and others are right, then free trade would be a suckered- policy for the country that practices it in the face of a protected and heavily subsidizing government-influenced country like China these days. China, after all, has been moving rapidly upward in both absolute and relative GDP-terms as originally a low-wage economy. It still is that, but what could then explain its rapidly growing percentage of advanced electronic goods . . . including those in ICT industries?

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In the early 1990s, to clarify this point, Krugman said that strategic trade theory really didn’t require any policy changes for the US (and others) that conformed to the GATT (and later WTO) policies.

His reasoning? In a journal (World Trade), he argued that GATT already let governments believe that imports were good, and exports bad. Remember, he didn’t buy trade protection beyond, possibly, some government subsidies for certain advanced technological industries if other countries were doing this. He just said that the existing trade system already, wrongly, fostered the belief that imports were bad, exports good.

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6) Leave aside whether that’s convincing. The big problem for trade theory still remains --- whether for New or Old theory.

As Krugman has also rightly noted --- to return to the Chinese rapid advance in high-tech ICT and consumer electronics --- trade theory hasn’t fully come to terms with “multi-stage” global production.

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In such production, you see, a country like China with low wages but a competent work force can benefit from multinational implants --- on Chinese government terms (almost always with a Chinese partner-firm and a certain amount of local R&D financed by the multinational). In this way, Chinese firms work with the advanced technologies even if they don’t create them; learn how to use them on their own --- with, so far, off-and-on success; assemble the final product from inputs produced elsewhere; and then export them to the US, Japan, Europe, and elsewhere.

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7) The political fall-out -- and the key economic problem that follows.

And that problem, ladies and gentleman -- along with the enormous pressures on low-skilled and semi-skilled workers in trade-competing industries: including in Europe and the US pressures from large numbers of low-skilled immigrants who add to the pool of low-skilled and semi-skilled workers who have been edged out of former trade-competing industries --- is why, among other things, the populist backlash against immigration, globalization, big finance, big business generally (to an extent), and politicians is at a maximum height these days in the US.

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And alas, talking about Austrian economists or free-trade values will not make this most recent populist backlash --- 80% of Americans saying we were in a bad or very bad economy almost a year ago before this recent financial crisis, with a growing majority opposed to globalization --- go away. Nor will ranting at Lou Dobb or others do the trick either.

A couple of hours after I posted the initial comments about Krugman and strategic trade theory --- specifically about the role of prisoners' dilemmas in his and others' work --- I returned to the long thread at Marginal Revolution, only to find that more and more venom was being directed at Krugman and Tyler Cowen himself.

So I posted these comments about such vitriol and ad hominen, ideologically motivated maliciousness.

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1) All these virulent complaints and politically motivated backbiting against the Swedish Economics Academy --- quite apart from sheer ideological scapegoating --- leave me wondering if any of the clamorous protesters read European newspapers on the Continent.

There, virtually every October for the last 35 years or so, there is a hue-and-cry raised by journalists and others that the Swedish Academy is biased in favor of free-market economics and is trying to foist such policies on the welfare-state, highly regulated European economies. (The protests, only fair to add, are usually less vocal from the more educated populations in Scandinavia and Holland, whose economies have flourished with free trade.)

And I suppose the Swedish Academy was hypnotized by a swat-squad of George Mason University special forces when it awarded the Nobel Economics prize to Friedrich Hayek . . . not to mention about 15 faculty members at the University of Chicago, starting with Milton Friedman.

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2) Those who think that Krugman has turned against free trade are, to go further, simply wrong.

Here, at Mark Thoma's site, is a long thread Thoma initiated last December (2007) that begins with a lengthy slice of a Krugman commentary on free trade. Click here

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3) For an old chalky pedagogue like me, it's always sad to see especially young people --- maybe college or grad students or recent graduates --- have such rigid, cocksure views about complex matters that accomplished scholars have debated for decades.

And I say this as a moderate non-partisan guy, who spent lots of his last three decades at UC Santa Barbara battling with the cocksure, authoritarian-inclined pc-left pulpit-pounders . . . who, moreover, in a lengthy 10-article series at my web site in 2004 and 2005 explained why the US has been fortunate in its economic life to have no socialist traditions on the left or statist conservative-traditions of the Christian-Democratic (and other) sorts --- rooted in pre-industrial, pre-democratic traditions --- on the right.

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Which does not mean that there aren't some impressive accomplishments in West Europe that have, among other things, so far except in France and Italy kept the populations more in favor of globalization than has been the case for the badly battered American working-classes, along with a populist rage in it and the middle classes against big business, big finance, and politicians of all stripes.

1)At the end of the above buggy commentary, I noted that I personally preferred the less statist US political-economy compared to the more statist economies of the Continental Europeans --- or the highly regulated Japanese economy. Then, as I tried noted, I explained why our system was less statist in a good 10 lengthy articles at my web site in 2004 and 2005.

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In particular, why we have no socialist legacy on the left in this country, nor --- since the destruction of the landed, slave-holding, and militarized southern aristocracy in the Civil War --- conservative traditions rooted in pre-industrial, pre-democratic feudalism.

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2) Still, as I also noted, it doesn't follow that the West European welfare-state systems haven't considerable economic and political achievements to their credit . . . above all (should have mentioned this) the complex welfare-state mixed economy that emerged in Sweden in the early 1930s --- and was emulated everywhere in West Europe (even in Britain until the Thatcher era of the 1980s) --- ended once and for all, it seems, the violent, polarized ideological conflicts between socialism and capitalism of various kinds in Europe.

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3) Now, as for the concrete economic achievements, here is the quoted query left by Paul, a poster in Mark Perry's thread on Friday (Oct. 10th) where Mark listed the 10 top-ranked economies of the world in terms of competitive vigor . . . the ranking put out each year by the World Economic Forum on the basis of a variety of criteria.

....Paul's good, left-unanswered query:

"Mark, how does this competitive ranking compare to rankings on economic freedom, e.g. from the heritage foundation, which has the US at 5th in the world in economic freedom"

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4) Here's a fact-based, straightforward reply.

First: the 10 top ranked economies by the World Economic Forum posted by Mark in column 1, and the ranking in economic freedom by the Heritage Foundation in cooperation with the Wall Street Journal. Click here

5) As you can see, 4 of the top 10 WEF-ranked countries in economic competitiveness are listed by the Heritage/WSJ index as being in the top 10 free economies.

Another 4 are found between 11 and 20 on the econ freedom index.

And 2 --- Germany and Sweden --- are 23rd and 27th.

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6) The conclusion?

It's ambiguous. Six of the top 10 competitive economies aren't in the top 10 economically free countries. They have far more advanced welfare-state and regulatory rules and laws compared to the US. And, further, compared to Singapore (a small authoritarian Chinese city-state), Switzerland, and Canada.

But the more regulated, high-taxing, and (save for Japan) advanced welfare-state economies have their own vigor and competitive virtues; have shown an ability (save for Japan really) to adapt and overhaul their economies in the last decade; and have enjoyed solid growth in the last four years or more until very recently.

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7) One conclusion, though, is less ambiguous.

Capitalism comes in a variety of forms, all depending on the state-market relationships. And these are embedded not in theoretical socialist or free-market ideologies, but rather in the institutional, cultural, and political histories of these countries.

It's hard for Americans --- even professional economists in the main (who aren't well grounded in economic history) --- to grasp that free-market capitalism is a rarity in the world because of very different histories than our own country.

Contrary to what they seem to think, the United States became the mightiest industrial country in per capita income in the 1880s (Britain no. 1 until then) and in productivity slightly later by industrializing behind high tariff protection.

How much such protection in the early 19th century contributed to that industrial manufacturing thrust --- it started in 1791 --- has been debated by economic historians.

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No matter.

The protection was there, and it actually accentuated in the late 19th and early 20th century after some tepid liberalization in after the civil war.

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9) Moreover --- hold onto your seats, everyone! --- protectionism was the bedrock of the Republican Party until well into the post-WWII era. It was the Democratic Party that, off and on in the late 19th century, then during the Woodrow Wilson era (1912-1920), and FDR who opted for trade liberalization. And it was always Republican administrations that overturned the liberalization until after WWII. Click here for the CATO Institute survey.

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And there's more.

It was the Truman Administration, cooperating with Robert Taft and other Republican Congressmen and Senators, who managed to drag along the Republicans to endorse the GATT proposals --- watered down because of Republican hostility in Congress --- and to drag them out of foreign policy isolationism.

Note carefully now. As as the Clinton era showed, with NAFTA, Democratic leaders like the president managed to beat off the growing populist rebellion against rapid globalization and de-industrialization that set in during the late 1970s and, since then, has accelerated. (Only fair to add that some recent and good economic historical work has shown that the shift of American industrial jobs abroad --- due to both trade liberalization and multinational expansion from the US home base --- didn’t accelerate in the 1980s and 1990s compared to the previous two decades.

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It has definitely accelerated in the last 8 years though. And financial interdependence has exploded in the last 30 years beyond equivocal data.

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10) Oh, before I forget. It was President Reagan in the 1980s who tried to deflect protectionism from Republican and Democratic ranks by signing into law a policy that began arm-twisting countries abroad to open up their markets --- contrary to standard free trade theory (especially robust libertarian versions) --- on pain of being retaliated against. And it was George Bush Sr.’s administration that began forcing Japan’s government to negotiate openings there (with little results).

And it is George W. Bush’s first administration --- not the Clinton’s two administration --- that demagogically protected the steel industry in order to boost the Republican electoral gains in the 2002 Congressional elections. The demagogic gesture, please note, that was condemned by the World Trade Organization.

It was another reason our allies in Europe and Japan found that the first Bush administration was both arrogant and unilateralist in certain economic and security ways. (I myself supported our multilateral military intervention in Iraq in 2003, only to be uttterly dismayed by the blithe, blase manner in which the occupation was prepared for and maintained for 3.5 disastrous years.)

Is it at all possible for you to post something less than a 1,500 word essay on every topic? Posting on ad hominem attacks when no poster here has attacked Krugman seems to be particularly agregious. Some discrete blue pencilling might be in order.

Krugman's articles for the NYT have been increasingly partisan so it is hardly surprising that he has become a controversial figure. Few would dismiss the brilliance of his early work which has been recognized by this award.

A perfectly reasonable request by you. Note though. The two longer posts (1 and 3) are each about 1150 words, not 1500. And 2) --- taken from the Marginal Revolution, where hatred of Krugman ran rampant in way too many circles --- was exactly 446 words.

...Michael

PS: I appreciated our lengthy exchanges about Obama in the thread started by Mark about the World Economic Forum.

You, along with Walt G --- who, alas, may have dropped out of the thread out of disillusion --- remain in my view the two most thoughtful regulars here.

“While Friedman's theoretical work is universally admired by professional economists, there's much more ambivalence about his policy pronouncements and especially his popularizing. And it must be said that there were some serious questions about his intellectual honesty when he was speaking to the mass public.” - Paul Krugman

It would appear that the Marginal Revolution reflects a similar ambivalence towards Krugman's work for the Gregy Lady. It is an opportunity cost which keeps a brilliant man from more important research work.

All of us here are presented with a similar dilemna although we are not nobelists. To blog or not to blog? Call it what we may educational, mentally stimulating, etc., it nevertheless implies a tradeoff.

Walt g's recent absence may indicate a decision to maximize personal performance. I also miss his well argued, logical posts and good humor.

MP writes: "The 2000 Clinton tax rates are shown above. Assuming Krugman is already in the top tax bracket, the difference in income taxes on the $1.4 million prize income between the old rate under Clinton of 39.6% and today's rate under Bush of 35% would be $64,400"

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